An Israeli helicopter late on Thursday fired a rocket at a car in which the two were traveling in the eastern Zaitun area of the city.
An Israeli spokesman confirmed the strike, saying "an aerial operation succeeded in killing Hazim Arhim, who was preparing a large-scale anti-Israel attack in the coming days".
Arhim, 27, of Islamic Jihad's al-Quds Brigade had been sought by Israeli forces for alleged involvement in several attacks.
The Israelis say Arhim organised human bombings and was responsible for other attacks against targets in Israel and on soldiers and settlers in the Gaza Strip.
The latest deaths bring to 4,188 the number of people killed since the start of the Intifada in September 2000, including 3,191 Palestinians and 926 Israelis.